Economic firepower is fine, but let’s give the bazooka a break
(Photo: Photo: Shutterstock)
By Daniel Moss
China’s latest attempt to prop up the economy and support markets is commendable – even more so if the follow-up is resolute. In difficult times, it is crucial that policymakers get ahead of the markets, or at least do not show themselves to be constantly playing catch-up. Taking the initiative counts, but military metaphors only go so far. They can both darken and illuminate.
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The package rolled out on Tuesday was remarkable in content and delivery. The markets were enthusiastic, at least for a day. Images of the battlefield were everywhere: a stimulus blitz had been unleashed. The measures, which included an interest rate cut and steps to support the stock market, amounted to a ‘barrage’. Cash amounts will be distributed to people in extreme poverty. And of course, no policy change would be complete without “bazooka.” That tag probably shouldn’t be used to give praise. It has a tumultuous history.
The World War II GI’s individual anti-tank weapon has been used to describe responses as diverse as the Bank of Japan’s ramping up of quantitative easing a decade ago and Mario Draghi’s race to keep the eurozone intact. Understanding the B-word and some of its complex applications is helpful in figuring out what might come next, and why there is likely no single solution to China’s challenges.
There is one particularly unfortunate reference to another era: the US subprime crisis of 2007-2009. Although efforts to save the American and global economies are now praised, certain aspects of what happened did not seem so heroic at the time. There were certainly bad decisions as well as breakthroughs, and Henry Paulson, the US Secretary of the Treasury under George W. Bush, probably wishes he had never heard of the M9A1 Rocket Launcher. To understand the context, we have to go back to the darkest weeks of 2008.
Concerned about the stability of Freddie Mac and Fannie Mae, Mr. Paulson went to Capitol Hill and sought the opportunity to seize the companies – if necessary. The companies operated under government charter and accounted for nearly half of the U.S. mortgage market. He told lawmakers that giving him the power to bail them out would be reassuring and that private capital would continue to flow. “If you have a bazooka in your pocket and people know it, you probably don’t need to use it,” Paulson told senators in July. Congress quickly passed the law.
It wasn’t enough. Shares of Fannie and Freddie plummeted, and in September officials were forced to nationalize them. What Mr. Paulson was so convinced would not be necessary was in fact necessary. There is even an argument that the bazooka did not strengthen confidence in the two companies, but actually undermined it by increasing the threat of state action. It was a difficult period: on September 15, Lehman Brothers Holdings Inc. filed for bankruptcy.
Despite the Freddie-Fannie debacle, the bazooka refused to stand still. The analogy has evolved to the point where you have to destroy everything you have on a problem with as big a weapon as you have. You assume, or hope, that the markets will realize that there is no point in fighting beyond a certain point. Within days of Lehman’s bankruptcy, American International Group Inc received an emergency hotline from the Fed. Officials lobbied Congress for the broad $700 billion financial rescue package that became known as the Troubled Asset Relief Program. It was originally intended to facilitate the purchase of dodgy assets from banks, but eventually became a kind of universal fund. The lesson is to keep improvising. Conducting stress tests on banks in early 2009 was an idea that Tim Geithner, Paulson’s successor, came up with during a short break on a Mexican beach.
By the time the results were published in May 2009, markets had begun to recover and banks were making profits again. The economy soon began to grow again and the expansion became the longest on record. Circumstances may rightly look miserable in the moment, but take on a more flattering assessment over time.
With such an imagined track record, it’s no wonder the bazooka is brought up as a metaphor whenever a big weapon is needed. But by firing everything at anything, it doesn’t really mean much anymore. Almost as cliché as the bazooka is the follow-up sentence: it’s not big enough.
Chinese officials are really facing a lot of incoming fire: a disappointing recovery from the pandemic, the threat of deflation and the ongoing slump in the real estate sector. China is also improvising, with local authorities encouraged to buy empty houses and officials floating the idea of a market stabilization fund. Beijing is also considering an injection of $142 billion into the largest state-owned banks. It was certainly an impressive week for policy mobilization. If one doesn’t work, try the other.
In a difficult situation, thinking creatively and big can be beneficial. There is much to be said for pooling national power in moments of acute need. But please, let’s give the bazooka a break.
First publication: September 27, 2024 | 11:53 PM IST